Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended |
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number:
(Exact name of Registrant as specified in its charter)
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
|
(Address of principal executive offices) |
(Zip code)
|
Registrant's telephone number, including area code
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Indicate by check mark whether the
registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ |
Accelerated filer ☐ |
Smaller reporting company |
Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| The |
The Registrant has shares of common stock outstanding as of May 15, 2023.
FRANKLIN WIRELESS CORP.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2023
INDEX
| 2 |
NOTE ON FORWARD LOOKING STATEMENTS
You should keep in mind the following points as you read this Report on Form 10-Q:
The terms “we,” “us,” “our,” “Franklin,” “Franklin Wireless,” or the “Company” refer to Franklin Wireless Corp.
This Report on Form 10-Q contains statements which, to the extent they do not recite historical fact, constitute “forward looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward looking statements are used under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” and elsewhere in this Quarterly Report on Form 10-Q. You can identify these statements by the use of words like “may,” “will,” “could,” “should,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,” “continue,” and variations of these words or comparable words. Forward looking statements do not guarantee future performance and involve risks and uncertainties. Actual results may differ substantially from the results that the forward looking statements suggest for various reasons, including those discussed under the caption “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2022. These forward looking statements are made only as of the date of this Report on Form 10-Q. We do not undertake to update or revise the forward looking statements, whether as a result of new information, future events or otherwise.
| 3 |
PART I – FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (unaudited)
FRANKLIN WIRELESS CORP.
Consolidated Balance Sheets
March 31, 2023 | ||||||||
| (Unaudited) | June 30, 2022 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Short-term investments-others | ||||||||
| Accounts receivable, net | ||||||||
| Other receivables, net | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Prepaid income taxes | ||||||||
| Loan to an employee | ||||||||
| Advance payments to vendors | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Deferred tax assets, non-current | ||||||||
| Goodwill | ||||||||
| Right of use assets | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Income tax payable | ||||||||
| Unearned revenue | ||||||||
| Advance payments from customers | ||||||||
| Accrued liabilities | ||||||||
| Lease liabilities, current | ||||||||
| Total current liabilities | ||||||||
| Lease liabilities, non-current | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 8) | ||||||||
| Stockholders’ equity: | ||||||||
| Parent Company stockholders’ equity | ||||||||
| Preferred stock, par value $ per share, authorized shares; preferred stock issued and outstanding as of March 31, 2023, and June 30, 2022 | ||||||||
| Common stock, par value $ per share, authorized shares; and shares issued and outstanding as of March 31, 2023, and June 30, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Treasury stock, shares as of March 31, 2023, and June 30, 2022 | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Parent Company stockholders’ equity | ||||||||
| Non-controlling interests | ||||||||
| Total stockholders’ equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
See accompanying notes to consolidated financial statements (unaudited).
| 4 |
FRANKLIN WIRELESS CORP.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income, net: | ||||||||||||||||
| Interest income | ||||||||||||||||
| Income from governmental subsidy | ( | ) | ||||||||||||||
| Gain from the forgiveness of accounts payable and accrued liabilities | ||||||||||||||||
| Gain (loss) from foreign currency transactions | ( | ) | ( | ) | ||||||||||||
| Other income, net | ||||||||||||||||
| Total other income, net | ||||||||||||||||
| Loss before benefit for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax benefit | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Less: non-controlling interests in net income (loss) of subsidiary at 33.7% | ( | ) | ( | ) | ( | ) | ||||||||||
| Net income (loss) attributable to Parent Company | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Basic income (loss) per share attributable to Parent Company stockholders | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Diluted income (loss) per share attributable to Parent Company stockholders | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Weighted average common shares outstanding – basic | ||||||||||||||||
| Weighted average common shares outstanding – diluted | ||||||||||||||||
| Comprehensive income (loss) | ||||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Translation adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Less: comprehensive income (loss) attributable to non-controlling interest | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive income (loss) attributable to controlling interest | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
See accompanying notes to consolidated financial statements (unaudited).
| 5 |
FRANKLIN WIRELESS CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Three and Nine Months Ended March 31, 2023 (unaudited)
| Common Stock | Additional Paid-in | Retained | Treasury | Accumulated Other Comprehensive Income | Non-controlling | Total Stockholders | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Stock | (Loss) | Interest | Equity | |||||||||||||||||||||||||
| Balance - June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Net loss attributable to Parent Company | – | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Foreign exchange translation | – | |||||||||||||||||||||||||||||||
| Issuance of stock related to stock option exercised | ||||||||||||||||||||||||||||||||
| Compensation expense related to stock option granted | – | |||||||||||||||||||||||||||||||
| Comprehensive loss attributable to non-controlling interest | – | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Balance - December 31, 2022 (unaudited) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Net income attributable to Parent Company | – | |||||||||||||||||||||||||||||||
| Foreign exchange translation | – | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Compensation expense related to stock option granted | – | |||||||||||||||||||||||||||||||
| Comprehensive loss attributable to non-controlling interest | – | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Balance - March 31, 2023 (unaudited) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
See accompanying notes to consolidated financial statements (unaudited).
| 6 |
FRANKLIN WIRELESS CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Three and Nine Months Ended March 31, 2022 (unaudited)
| Common Stock | Additional Paid-in | Retained | Treasury | Accumulated Other Comprehensive | Non-controlling | Total Stockholders | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Stock | Loss | Interest | Equity | |||||||||||||||||||||||||
| Balance - June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Net loss attributable to Parent Company | – | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Foreign exchange translation | – | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Issuance of stock related to stock option exercised | ||||||||||||||||||||||||||||||||
| Compensation expense related to stock option granted | – | |||||||||||||||||||||||||||||||
| Comprehensive income attributable to non-controlling interest | – | |||||||||||||||||||||||||||||||
| Balance - December 31, 2021 (unaudited) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Net loss attributable to Parent Company | – | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Foreign exchange translation | – | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Compensation expense related to stock option granted | – | |||||||||||||||||||||||||||||||
| Comprehensive loss attributable to non-controlling interest | – | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Balance - March 31, 2022 (unaudited) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||
See accompanying notes to consolidated financial statements (unaudited).
| 7 |
FRANKLIN WIRELESS CORP.
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOW FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization of intangible assets | ||||||||
| Stock based compensation | ||||||||
| Bad debt expense | ||||||||
| Forgiveness of debts | ( | ) | ||||||
| Amortization of right of use assets | ||||||||
| Deferred tax (benefit) | ( | ) | ( | ) | ||||
| (Decrease) increase in cash due to change in: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Prepaid income taxes | ( | ) | ( | ) | ||||
| Loan to an employee | ( | ) | ||||||
| Advance payments to vendors | ( | ) | ||||||
| Other assets | ||||||||
| Accounts payable | ||||||||
| Income tax payable | ( | ) | ( | ) | ||||
| Unearned revenue from customers | ( | ) | ||||||
| Lease liabilities | ( | ) | ( | ) | ||||
| Advance payments from customers | ||||||||
| Accrued liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOW FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of short-term investments | ( | ) | ( | )) | ||||
| Purchases of property and equipment | ( | ) | ( | )) | ||||
| Payments for capitalized product development costs | ( | ) | ( | )) | ||||
| Purchases of intangible assets | ( | ) | ( | )) | ||||
| Net cash used in investing activities | ( | ) | ( | )) | ||||
| CASH FLOW FROM FINANCING ACTIVITIES: | ||||||||
| Cash received from exercise of stock options | ||||||||
| Net cash provided by financing activities | ||||||||
| Effect of foreign currency translation | ( | ) | ( | ) | ||||
| Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the periods for: | ||||||||
| Income taxes | $ | ( | ) | $ | ( | ) | ||
See accompanying notes to consolidated financial statements (unaudited).
| 8 |
FRANKLIN WIRELESS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial
statements include the accounts of the Company and its subsidiary, Franklin Technology Inc. (“FTI”), with a majority voting
interest of
As consolidated financial statements are based on the assumption that they represent the financial position and operating results of a single economic entity, the retained earnings or deficit of the subsidiary at the date of acquisition, October 1, 2009, by the parent are excluded from consolidated retained earnings. When a subsidiary is consolidated, the consolidated financial statements include the subsidiary’s revenues, expenses, gains, and losses only from the date the subsidiary is initially consolidated, and the non-controlling interest is reported in the consolidated statement of financial position within equity, separately from the parent’s equity. There are no shares of the Company held by any subsidiaries as of March 31, 2023, or June 30, 2022.
Non-controlling Interest in a Consolidated Subsidiary
As of March 31, 2023, the
non-controlling interest was $
Segment Reporting
Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” requires public companies to report financial and descriptive information about their reportable operating segments. We identify our operating segments based on how our chief operating decision maker internally evaluates separate financial information, business activities and management responsibility. We have one reportable segment, consisting of the sale of wireless access products.
We generate revenues from three geographic areas, consisting of North America, the Caribbean and South America, and Asia. The following enterprise-wide disclosure is prepared on a basis consistent with the preparation of the consolidated financial statements. The following table contains certain financial information by geographic area:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| Net sales: | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| Caribbean and South America | ||||||||||||||||
| Asia | ||||||||||||||||
| Totals | $ | $ | $ | $ | ||||||||||||
| 9 |
| Long-lived assets, net (property and equipment and intangible assets): | March 31, 2023 | June 30, 2022 | ||||||
| North America | $ | $ | ||||||
| Asia | ||||||||
| Totals | $ | $ | ||||||
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of financial instruments such as cash equivalents, short-term investments, accounts receivable, accounts payable and debt approximate the related fair values due to the short-term maturities of these instruments. We invest our excess cash into financial instruments which are readily convertible into cash, such as money market funds and certificates of deposit.
Allowance for Doubtful Accounts
Based upon our review of our
collection history as well as the current balances associated with all significant customers and associated invoices, as of March 31,
2023, we did
Revenue Recognition
In April 2016, the FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606) (ASU 2016-10), which amends and adds clarity to certain aspects of the guidance set forth in the original revenue standard (ASU 2014-09) related to identifying performance obligations and licensing. In May 2016, the FASB issued Accounting Standards Update No. 2016-11, Revenue Recognition (Topic 605), which amends and rescinds certain revenue recognition guidance previously released within ASU 2014-09. In May 2016 the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606) (ASU 2016-12), which provides narrow scope improvements and practical expedients related to ASU 2014-09.
On July 1, 2018, we adopted ASU 2014-09 using the modified retrospective method applied to those contracts that were not completed or substantially complete as of June 30, 2018. Results for the reporting period beginning after July 1, 2018 are presented under Topic 606. We recorded no change in retained earnings as of July 1, 2018 as a result of the cumulative impact of adopting Topic 606.
Contracts with Customers
Revenue for sales of products and services is derived from contracts with customers. The products and services promised in contracts primarily consist of hotspot routers. Contracts with each customer generally state the terms of the sale, including the description, quantity and price of each product or service. Payment terms are stated in the contract, primarily in the form of a purchase order. Since the customer typically agrees to a stated rate and price in the purchase order that does not vary over the life of the contract, the majority of our contracts do not contain variable consideration. We establish a provision for estimated warranty and returns. Using historical averages, that provision for the nine months ended March 31, 2023 was not material.
| 10 |
Disaggregation of Revenue
In accordance with Topic 606, we disaggregate revenue from contracts with customers into geographical regions and by the timing of when goods and services are transferred. We determined that disaggregating revenue into these categories meets the disclosure objective in Topic 606, which is to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by regional economic factors.
Contract Balances
We perform our obligations under a contract with a customer by transferring products in exchange for consideration from the customer. We typically invoice our customers as soon as control of an asset is transferred, and a receivable is established. We, however, recognize a contract liability when a customer prepays for goods and/or services, or we have not delivered goods under the contract since we have not yet transferred control of the goods and/or services.
The balances of our trade receivables are as follows:
| March 31, 2023 | June 30, 2022 | |||||||
| Accounts Receivable | $ | $ | ||||||
The balance of contract assets was immaterial as we did not have a significant amount of un-invoiced receivables in the periods ended March 31, 2023, and June 30, 2022.
Our contract liabilities are as follows:
| March 31, 2023 | June 30, 2022 | |||||||
| Undelivered products | $ | $ | ||||||
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of measurement in Topic 606. At contract inception, we assess the products and services promised in our contracts with customers. We then identify performance obligations to transfer distinct products or services to the customer. In order to identify performance obligations, we consider all the products or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices.
Our performance obligations are primarily satisfied at a point in time. Revenue from products transferred to customers at a single point in time accounted for 99.9% of net sales for the nine months ended March 31, 2023. Revenue recognized over a period of time for non-recurring engineering projects is based on the percent complete of a project and accounted for 0.1% of net sales for the nine months ended March 31, 2023. The majority of our revenue recognized at a point in time is for the sale of hotspot router products. Revenue from these contracts is recognized when the customer is able to direct the use of and obtain substantially all of the benefits from the product, which generally coincides with title transfer at completion of the shipping process.
As of March 31, 2023, our contracts do not contain any unsatisfied performance obligations, except for undelivered products.
| 11 |
Cost of Goods Sold
All costs associated with
our contract manufacturers, as well as distribution, fulfillment and repair services, are included in our cost of goods sold. Cost of
goods sold also includes amortization expenses of $
Capitalized Product Development Costs
Accounting Standards Codification (“ASC”) Topic 350, “Intangibles - Goodwill and Other” includes software that is part of a product or process to be sold to a customer and is accounted for under Subtopic 985-20. Our products contain embedded software internally developed by FTI, which is an integral part of these products because it allows the various components of the products to communicate with each other and the products are clearly unable to function without this coding.
The costs of product development that are capitalized once technological feasibility is determined (noted as technology in progress in the Intangible Assets table in Note 3 to Notes to Consolidated Financial Statements) include related licenses, certification costs, payroll, employee benefits, and other headcount-related expenses associated with product development. We determine that technological feasibility for our products is reached after all high-risk development issues have been resolved. Once the products are available for general release to our customers, we cease capitalizing the product development costs and any additional costs, if any, are expensed. The capitalized product development costs are amortized on a product-by-product basis using the greater of straight-line amortization or the ratio of the current gross revenues to the current and anticipated future gross revenues. The amortization begins when the products are available for general release to our customers.
As of March 31, 2023, and
June 30, 2022, capitalized product development costs in progress were $
Research and Development Costs
Costs associated with research
and development are expensed as incurred. Research and development costs were $
Warranties
We provide a warranty for one year which is covered by our vendors and manufacturers under purchase agreements between the Company and the vendors. As a result, we believe we do not have any net warranty exposure and do not accrue any warranty expenses. Historically, the Company has not experienced any material net warranty expenditures.
Shipping and Handling Costs
Costs associated with product
shipping and handling are expensed as incurred. Shipping and handling costs, which are included in selling, general and administrative
expenses on the consolidated statements of comprehensive income, were $
| 12 |
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flow, we consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. We invest our excess cash into financial instruments which management believes are readily convertible into cash, such as money market funds that are readily convertible to cash and have a $1.00 net asset value.
Short Term Investments
We have invested excess funds in short term liquid assets, such as certificates of deposit.
Inventories
Our inventories consist
of finished goods and are stated at the lower of cost or net realizable value, cost being determined on a first-in, first-out basis.
We assess the inventory carrying value and reduce it, if necessary, to its net realizable value based on customer orders on hand,
and internal demand forecasts using management’s best estimates given information currently available. Our customer demand is
highly unpredictable and can fluctuate significantly caused by factors beyond the control of the Company. We may write down our
inventory value for potential obsolescence and excess inventory. As of March 31, 2023, and June 30, 2022, we have recorded inventory
reserves in the amount of $
Property and Equipment
Property and equipment are recorded at cost. Significant additions or improvements extending useful lives of assets are capitalized. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives as follows:
| Machinery | ||
| Office equipment | ||
| Molds | ||
| Vehicles | ||
| Computers and software | ||
| Furniture and fixtures | ||
| Facilities improvements |
Goodwill and Intangible Assets
Goodwill and certain intangible assets were recorded in connection with the FTI acquisition in October 2009, and are accounted for in accordance with ASC 805, “Business Combinations.” Goodwill represents the excess of the purchase price over the fair value of the tangible and intangible net assets acquired. Intangible assets are recorded at their fair value at the date of acquisition. Goodwill and other intangible assets are accounted for in accordance with ASC 350, “Goodwill and Other Intangible Assets.” Goodwill and other intangible assets are tested for impairment at least annually and any related impairment losses are recognized in earnings when identified. No impairment was deemed necessary as of March 31, 2023 or June 30, 2022.
| 13 |
Long-lived Assets
In accordance with ASC 360, “Property, Plant, and Equipment,” we review for impairment of long-lived assets and certain identifiable intangibles whenever events or circumstances indicate that the carrying amount of assets may not be recoverable. We consider the carrying value of assets may not be recoverable based upon our review of the following events or changes in circumstances: the asset’s ability to continue to generate income from operations and positive cash flow in future periods; loss of legal ownership or title to the assets; significant changes in our strategic business objectives and utilization of the asset; or significant negative industry or economic trends. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset are less than its carrying amount.
As of March 31, 2023, and June 30, 2022, we were not aware of any events or changes in circumstances that would indicate that the long-lived assets are impaired.
The Company’s employee share-based awards result in a cost that is measured at fair value on an award’s grant date, based on the estimated number of awards that are expected to vest. Compensation costs are recognized over the period that an employee provides service in exchange for the award, i.e. the vesting period. The Company estimates the fair value of stock options using a Black-Scholes option pricing model. Transactions with non-employees in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Stock-based compensation costs are reflected in the accompanying consolidated statements of comprehensive income based upon the underlying recipients' roles within the Company.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Accordingly, deferred tax assets and liabilities are determined based on the difference between the financial statement and income tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recorded to reduce the carrying amount of deferred tax assets, unless it is more likely than not such assets will be realized. Current income taxes are based on the year’s taxable income for federal and state income tax reporting purposes and the annual change in deferred taxes.
The Company assesses its income tax positions and records tax benefits based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, the Company records the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit is recognized in the financial statements. The Company classifies interest and penalties associated with such uncertain tax positions as a component of income tax expense.
As of March 31, 2023, we have
no material unrecognized tax benefits. We recorded an income tax benefit of $
Earnings per share is calculated by dividing the net income by the weighted-average number of common shares that were outstanding for the period, without consideration for potential common shares. Diluted earnings per share is calculated by dividing the net income by the sum of the weighted-average number of dilutive potential common shares outstanding for the period determined using the treasury-stock method or the as-converted method. Potentially dilutive shares are comprised of common stock options outstanding under our stock plan.
| 14 |
Concentrations
We extend credit to our customers and perform ongoing credit evaluations of such customers. We evaluate our accounts receivable on a regular basis for collectability and provide for an allowance for potential credit losses as deemed necessary. No reserve was required or recorded for any of the periods presented.
Substantially all of our revenues are derived from sales of wireless data products. Any significant decline in market acceptance of our products or in the financial condition of our existing customers could impair our ability to operate effectively.
A significant portion of our
revenue is derived from a small number of customers. For the nine months ended March 31, 2023, sales to our two largest customers accounted
for
For the nine months ended
March 31, 2023, we purchased the majority of our wireless data products from three manufacturing companies located in Asia. If these manufacturing
companies were to experience delays, capacity constraints or quality control problems, product shipments to our customers could be delayed,
or our customers could consequently elect to cancel the underlying product purchase order, which would negatively impact the Company's
revenue. For the nine months ended March 31, 2023, we purchased wireless data products from these manufacturers in the amount of $
We maintain our cash accounts with established commercial banks. Such cash deposits exceed the Federal Deposit Insurance Corporation insured limit of $250,000 for each financial institution. However, we do not anticipate any losses on excess deposits.
NOTE 2 - BUSINESS OVERVIEW
We are a leading provider of integrated wireless solutions utilizing the latest in 4G LTE (fourth generation long-term evolution) and 5G (fifth generation) technologies including mobile hotspots, routers, CPEs (Customer Premise Equipment), and various trackers. Our integrated software subscription services provide users remote capabilities including mobile device management (MDM) and software defined wide area networking (SD-WAN).
We have majority ownership of Franklin Technology Inc. (FTI), a research and development company based in Seoul, South Korea. FTI primarily provides design and development services for our wireless products.
Our products are generally marketed and sold directly to wireless operators and indirectly through strategic partners and distributors. Our global customer base primarily extends from North America to Asia.
NOTE 3 – BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Franklin Wireless Corp. have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q. In the opinion of management, the financial statements included herein contain all adjustments, including normal recurring adjustments, considered necessary to present fairly the financial position, the results of operations and comprehensive income (loss) and cash flows of the Company for the periods presented. These financial statements and notes hereto should be read in conjunction with the financial statements and notes thereto for the fiscal year ended June 30, 2022 included in our Form 10-K filed on September 13, 2022. The operating results or cash flows for the interim periods presented herein are not necessarily indicative of the results to be expected for any other interim period or the full year.
| 15 |
NOTE 4 – DEFINITE LIVED INTANGIBLE ASSETS
The definite lived intangible assets consisted of the following as of March 31, 2023:
| Definite lived intangible assets: | Expected Life | Average Remaining life | Gross Intangible Assets | Less Accumulated Amortization | Net Intangible Assets | |||||||||||
| Complete technology | – | $ | $ | $ | ||||||||||||
| Technology in progress | Not Applicable | – | ||||||||||||||
| Software | ||||||||||||||||
| Patents | ||||||||||||||||
| Certifications & licenses | ||||||||||||||||
| Total as of March 31, 2023 | $ | $ | $ | |||||||||||||
The definite lived intangible assets consisted of the following as of June 30, 2022:
| Definite lived intangible assets: | Expected Life | Average Remaining life | Gross Intangible Assets | Less Accumulated Amortization | Net Intangible Assets | |||||||||||
| Complete technology | – | $ | $ | $ | ||||||||||||
| Technology in progress | Not Applicable | – | ||||||||||||||
| Software | ||||||||||||||||
| Patents | ||||||||||||||||
| Certifications & licenses | ||||||||||||||||
| Total as of June 30, 2022 | $ | $ | $ | |||||||||||||
Amortization
expense recognized for the three months ended March 31, 2023 and 2022 was $
| FY2023 | FY2024 | FY2025 | FY2026 | FY2027 | Thereafter | |||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of:
March 31, 2023 | June 30, 2022 | |||||||
| Machinery and Commercial Equipment | $ | $ | ||||||
| Office equipment | ||||||||
| Molds | ||||||||
| Vehicle | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
| 16 |
Depreciation expenses associated
with property and equipment were $
NOTE 6 - ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of:
| March 31, 2023 | June 30, 2022 | |||||||
| Accrued payroll deductions owed to government entities | $ | $ | ||||||
| Accrued salaries and incentives | ||||||||
| Accrued vacation | ||||||||
| Accrued undelivered inventory | ||||||||
| Accrued commission for service providers | ||||||||
| Accrued commission to a customer | ||||||||
| Other accrued liabilities | ||||||||
| Total | $ | $ | ||||||
For the three months ended March 31, 2023, we have calculated the dilutive effect of common stock arising from 649,001 stock options and excluded these securities from the calculation of diluted net income per share as they are anti-dilutive. For the nine months ended March 31, 2023, we were in a net loss position and have excluded stock options from the calculation of diluted net loss per share because these securities are anti-dilutive. For the three and nine months ended March 31, 2022, we were in a net loss position and have excluded stock options from the calculation of diluted net loss per share because these securities are anti-dilutive.
The weighted average number of shares outstanding used to compute earnings per share is as follows:
| Three Months ended March 31, | Nine Months Ended March 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net income (loss) attributable to Parent Company | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Weighted-average shares of common stock outstanding: | ||||||||||||||||
| Basic shares outstanding | ||||||||||||||||
| Dilutive effect of common stock equivalents arising from stock options | ||||||||||||||||
| Diluted shares outstanding | ||||||||||||||||
| Basic (loss) income per share | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Diluted (loss) income per share | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| 17 |
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Leases
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02 (Topic 842). Topic 842 amended several aspects of lease accounting, including requiring lessees to recognize leases with a term greater than one year as a right-of-use asset and corresponding liability, measured at the present value of the lease payments. In July 2018, the FASB issued supplemental adoption guidance and clarification to Topic 842 within ASU 2018-10 “Codification Improvements to Topic 842, Leases” and ASU 2018-11 “Leases (Topic 842): Targeted Improvements.” The new guidance aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. A modified retrospective application is required with an option to not restate comparative periods in the period of adoption.
With effect from July 1, 2019, we have adopted the provisions of the new standard. We decided to use the practical expedients available upon adoption of Topic 842 to aid the transition from current accounting to provisions of Topic 842. The package of expedients will effectively allow us to run off existing leases, as initially classified as operating and classify new leases after implementation under the new standard as the business evolves.
We have operating leases principally for both Franklin Wireless Corp. and Franklin Technologies Inc. Management evaluates each lease independently to determine the purpose and necessity to its future operations in addition to other appropriate facts and circumstances.
We adopted Topic 842 using a modified retrospective approach for our existing leases at July 1, 2019. The adoption of Topic 842 impacted our balance sheet by the recognition of the operating lease right-of-use assets and the liability for operating leases. The lease liability is based on the present value of the remaining lease payments, discounted using a market based incremental borrowing rate as the effective date of July 1, 2019 using current estimates as to lease term including estimated renewals for each operating lease.
On September 9, 2015, we signed
a lease for office space consisting of approximately 12,775 square feet, located in San Diego, California, at a monthly rent of $
Our Korea-based subsidiary,
FTI, leases approximately 10,000 square feet of office space, at a monthly rent of approximately $8,000, and additional office space consisting
of approximately 2,682 square feet at a monthly rent of approximately $2,700, both located in Seoul, Korea. These leases will expire on
August 31, 2023. In addition to monthly rent, the leases provide for periodic cost of living increases in the base rent and payment for
certain common area costs. These facilities are covered by an appropriate level of insurance, and we believe them to be suitable for our
use and adequate for our present needs. Rent expense related to these leases was approximately $
We lease one corporate housing
facility, located in Seoul, Korea, primarily for our employees who travel, under a non-cancelable operating lease that will expire on
September 4, 2023. Rent expense related to this lease was $
| 18 |
As of March 31, 2023, we used
a discount rate of
Future minimum payments under operating leases are as follows:
| Operating Lease | ||||
| Fiscal 2023 | $ | |||
| Fiscal 2024 | ||||
| Total lease payments | ||||
| Less imputed interest | ( | ) | ||
| Total | $ | |||
Litigation
We are from time to time involved in certain legal proceedings and claims arising in the ordinary course of business.
Verizon Jetpack Recall
On April 8, 2021, Verizon issued a press release announcing that it is working with the U.S. Consumer Product Safety Commission (CPSC) to conduct a voluntary recall of certain Verizon Ellipsis Jetpack mobile hotspot devices, indicating that the lithium-ion battery in the devices can overheat, posing a fire and burn hazard. According to the CPSC release, the recall affects approximately 2.5 million devices. We import the devices and supply them to Verizon.
Verizon first advised us of one alleged Jetpack device failure at the end of February 2021. We immediately began meeting with Verizon and requested access to the device. We also began internal testing to evaluate device performance. We did not receive any further incident information until the last week of March 2021. On April 1, 2021 we issued a press release announcing that we had received reports from Verizon about potential issues with the batteries in the devices. On April 9, 2021 we issued a press release announcing the voluntary recall by Verizon.
As of the date of this report, we have been unable to recreate any device failures of the type identified by Verizon. All internal testing conducted to date has confirmed that the Jetpack devices are performing within normal parameters. We are not currently aware of any aspect of the Jetpack design that could cause the devices to fail in the way described in Verizon’s recall notice.
Future Impact on Financial Performance
We are striving to avoid any litigation arising from the recall and have not been served with any legal action relating to the products covered by the recall. We are not currently able to estimate the financial impact of the recall on our future operations. At this time, we do not have information that identifies the cause of the alleged incidents. We also do not have any specific legal claims or theories of causation for device failure incidents that would help us estimate the cost of potential future litigation. No liability has been recorded for this litigation because the Company believes that any such liability is not probable and reasonably estimable at this time.
| 19 |
Shareholder Litigation
Ali
A shareholder action, Ali vs. Franklin Wireless Corp. et al. Case #3:21-cv-00687-AJB-MSB, was filed in the U.S. District Court, Southern District of California (San Diego) on April 16, 2021, alleging, among other things, that we had prior knowledge that the recall was likely and that we did not disclose that information to investors in a timely manner. We believe these allegations are not supported by the facts and we will vigorously defend against such claims. Discovery is ongoing at this time.
Harwood / Martin
A legal action was filed in the U.S. District Court, Southern District of California (San Diego) against Franklin, as a nominal defendant, Stephen Norwood Derivatively on Behalf of Nominal Defendant Franklin Wireless Corp. v. OC Kim, Et al., Case #21cv01837-JAH-DEB, on or about October 29, 2021, claiming among other things, that we had prior knowledge that the recall was likely and that we did not disclose that information to investors in a timely manner. We believe these allegations are not supported by the facts and we will vigorously defend against such claims.
A legal action was filed in the U.S. District Court, Southern District of California (San Diego) against Franklin, as a nominal defendant, by Debra Martin, derivatively on behalf of nominal defendant Franklin Wireless Corp. v. OC Kim, Et al., Case #21cv2091-CAB-KSC, on or about December 15, 2021, claiming among other things, that we had prior knowledge that the recall was likely and that we did not disclose that information to investors in a timely manner. We believe these allegations are not supported by the facts and we will vigorously defend against such claims.
The Harwood and Martin actions have recently been consolidated into a single action in the U.S. District Court, Southern District of California (San Diego) titled “In re Franklin Wireless Corp. Derivative Litigation”, Case No.: 21cv1837-AJB (MSB). Discovery is ongoing at this time.
Pape
A legal action was filed in the Second Judicial District Court of Nevada in the County of Washoe against Franklin, as a nominal defendant, Barbara Pape, derivatively on behalf of nominal defendant Franklin Wireless Corp. v. OC Kim, Et al., Case # CV22-00471, on or about March 21, 2022, claiming among other things, that we had prior knowledge that the recall was likely and that we did not disclose that information to investors in a timely manner. We believe these allegations are not supported by the facts and we will vigorously defend against such claims.
The Company will vigorously defend such shareholder litigation and proceedings. No liability has been recorded for these litigations because the Company believes that any such liability is not probable and reasonably estimable at this time.
“Short-Swing” Profits Litigation
A legal action was filed in the U.S. District Court, Southern District of California (San Diego) against Franklin, as a nominal defendant, Nosirrah Management LLC v. Franklin Wireless et al. Case # 3:21-cv-01316-CAB-JLB, on or about July 22, 2021, claiming that our Chief Executive Officer, OC Kim, violated Section 16(b) of the Securities Exchange Act of 1934 for receiving “short-swing” profits from a sale and purchase of Franklin shares, in violation of that Act. We believe the allegations are not supported by the facts and we intend to vigorously defend against these claims. No liability has been recorded for this litigation because the Company believes that any such liability is not probable and reasonably estimable at this time.
| 20 |
Franklin v. Anydata, Inc.
We entered into a Professional Services Agreement
with Anydata Corp. (“Anydata”) for the product ACT233F Smart Link OBD device on May 5, 2017, for a minimum purchase commitment
of 250,000 units. We have delivered approximately 25,000 units and 7,000 units during our second and fourth quarters of fiscal 2018, respectively,
and an additional 18,000 units during our first quarter of fiscal 2019. Sales to Anydata were approximately $1.8 million for the year
ended June 30, 2019. We have received information that Anydata may not be able to fulfill the entire purchase commitment for which parts
have already been ordered with our main vendor, Quanta. We believe that the Company will be able to supply some of the products to another
customer and has received personal guarantees from the ownership group of Anydata. As of June 30, 2019, the remaining unfulfilled purchase
commitment was approximately $3.1 million. The total product purchase commitment with Quanta was approximately $2.9 million. We have not
recorded a receivable from Anydata, nor a liability owed to Quanta. Management believes that, at this time, a loss contingency is reasonably
possible but not estimable as to how much ultimately would be paid to Quanta. As of June 30, 2020, we paid $
Aperture Net LLC. v. Franklin Wireless Corp.
On November 29, 2022 Aperture Net LLC (“Aperture Net”) filed a patent infringement suit against Franklin, alleging that Franklin Wireless’ R910 Mobile Hotspot infringes U.S. Patent No. 6711,204 (the “204 Patent”), entitled “Channel sounding for a spread-spectrum signal.” This matter has been dismissed from the court by mutual agreement of the parties on March 27th, 2023.
Change of Control Agreements
On October 1, 2020, we entered into Change of Control Agreements with OC Kim, our President, and Yun J. (David) Lee, our Chief Operating Officer. Each Change of Control Agreement provides for a lump sum payment to the officer in case we experience a change of control. The term includes the acquisition of our Common Stock resulting in one person or company owning more than 50% of the outstanding shares, a significant change in the composition of the Board of Directors during any 12-month period, a reorganization, merger, consolidation or similar transaction resulting in the transfer of ownership of more than fifty percent (50%) of our outstanding Common Stock, or a liquidation or dissolution or sale of substantially all of our assets.
The Change of Control Agreement with Mr. Kim calls for a payment of $5 million upon a change of control, and the agreement with Mr. Lee calls for a payment of $2 million upon a change of control.
Severance Agreement
On November 10, 2022 the Company and OC Kim, its President, entered into an amendment of the employment letter agreement dated September 7, 2021. The amendment provides for a severance payment of $3 million if Mr. Kim voluntarily terminates his employment by the Company or if he voluntarily terminates his employment due to a “change in circumstances,” generally defined as a material breach by the Company of its salary and benefit obligations or a significant reduction in Mr. Kim’s title or responsibilities. In the case of a termination of employment by the Company for cause (generally defined as conviction of a felony, or a misdemeanor where imprisonment is imposed, commission of any act of theft, fraud, dishonesty, or material falsification of any employment or Company records, or improper disclosure of the Company's confidential or proprietary information), the Company is to make a severance payment of $1,500,000. In either case, any unvested options become immediately vested.
| 21 |
In the amendment, Mr. Kim also agrees that, for a period of two years after termination, he will not disparage the Company or its officers, solicit any of its employees to terminate their employment, or disclose any of the Company’s proprietary information.
In addition, the amendment provides for the payment of an incentive bonus to Mr. Kim of $125,000 for each calendar quarter during the remaining four year term of the employment letter, with the first such bonus due on December 31, 2022.
International Tariffs
We believe that our products are currently exempt from international tariffs upon import from our manufacturers to the United States. If this were to change at any point, a tariff of 10%-25% of the purchase price would be imposed. If such tariffs are imposed, they could have a materially adverse effect on sales and operating results.
Customer Indemnification
Under purchase orders and contracts for the sale of our products we may provide indemnification to our customers for potential intellectual property infringement claims for which we may have no corresponding recourse against our third-party licensors. This potential liability, if realized, could materially adversely affect our business, operating results and financial condition.
We apply the provisions of ASC 718, “Compensation - Stock Compensation,” to all of our stock-based compensation awards and use the Black-Scholes option pricing model to value stock options. Under this application, we record compensation expense for all awards granted.
In 2009, we adopted the Stock Incentive Plan (“2009 Plan”), which provided for the grant of incentive stock options and non-qualified stock options to our employees and directors. Options granted under the 2009 Plan generally have a term of ten years and generally vest and become exercisable at the rate of 33% after one year and 33% on the second and third anniversaries of the option grant dates. Historically, some stock option grants have included shorter vesting periods ranging from one to two years.
In July of 2020, the Board of Directors adopted the 2020 Franklin Wireless Corp. Stock Option Plan (the “2020 Plan”), which covers shares of Common Stock. The 2020 Plan provides for the grant of incentive stock options, non-qualified stock options and restricted stock to our employees, directors, and independent contractors. These options will have such vesting or other provisions as may be established by the Board of Directors at the time of each grant.
The estimated forfeiture rate considers historical turnover rates stratified into employee pools in comparison with an overall employee turnover rate, as well as expectations about the future. We periodically revise the estimated forfeiture rate in subsequent periods if actual forfeitures differ from those estimates. There were $ and $ in compensation expenses recorded under this method for the nine months ended March 31, 2023 and 2022, respectively.
| 22 |
A summary of the status of our stock options is presented below as of March 31, 2023:
| Weighted- | ||||||||||||||||
| Average | ||||||||||||||||
| Weighted- | Remaining | |||||||||||||||
| Average | Contractual | Aggregate | ||||||||||||||
| Exercise | Life | Intrinsic | ||||||||||||||
| Options | Shares | Price | (In Years) | Value | ||||||||||||
| Outstanding as of June 30, 2022 | $ | $ | ||||||||||||||
| Granted | – | – | ||||||||||||||
| Exercised | ( | ) | – | – | ||||||||||||
| Cancelled | – | – | ||||||||||||||
| Forfeited or expired | ( | ) | – | – | ||||||||||||
| Outstanding as of March 31, 2023 | $ | $ | ||||||||||||||
| Exercisable as of March 31, 2023 | $ | $ | ||||||||||||||
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based upon the Company’s closing stock price of $4.98 as of March 31, 2023, which would have been received by the option holders had all option holders exercised their options as of that date. The weighted-average grant-date fair value of stock options outstanding as of March 31, 2022, in the amount of shares was $ per share. As of March 31, 2023, there was unrecognized compensation cost of $ related to non-vested stock options granted.
A summary of the status of our stock options is presented below as of March 31, 2022:
| Weighted- | ||||||||||||||||
| Average | ||||||||||||||||
| Weighted- | Remaining | |||||||||||||||
| Average | Contractual | Aggregate | ||||||||||||||
| Exercise | Life | Intrinsic | ||||||||||||||
| Options | Shares | Price | (In Years) | Value | ||||||||||||
| Outstanding as of June 30, 2021 | $ | $ | ||||||||||||||
| Granted | – | – | ||||||||||||||
| Exercised | ( | ) | – | – | ||||||||||||
| Cancelled | – | – | ||||||||||||||
| Forfeited or expired | ( | ) | – | – | ||||||||||||
| Outstanding as of March 31, 2022 | $ | $ | ||||||||||||||
| Exercisable as of March 31, 2022 | $ | $ | ||||||||||||||
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based upon the Company’s closing stock price of $3.985 as of March 31, 2022, which would have been received by the option holders had all option holders exercised their options as of that date. The weighted-average grant-date fair value of stock options outstanding as of March 31, 2022, in the amount of shares, was $ per share. As of March 31, 2022, there was unrecognized compensation cost of $ related to non-vested stock options granted.
| 23 |
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this report. This report contains certain forward-looking statements relating to future events or our future financial performance. These statements are subject to risks and uncertainties which could cause actual results to differ materially from those discussed in this report. You are cautioned not to place undue reliance on this information, which speaks only as of the date of this report. We are not obligated to publicly update this information, whether as a result of new information, future events or otherwise, except to the extent we are required to do so in connection with our obligation to file reports with the SEC. For a discussion of the important risks to our business and future operating performance, see the discussion under the caption “Item 1A. Risk Factors” and under the caption “Factors That May Influence Future Results of Operations” in the Company’s Form 10-K for the year ended June 30, 2022, filed on September 13, 2022. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.
BUSINESS OVERVIEW
We are a leading provider of integrated wireless solutions utilizing the latest in 4G LTE (fourth generation long-term evolution) and 5G (fifth generation) technologies including mobile hotspots, routers, CPEs (Customer Premise Equipment), and various trackers. Our integrated software subscription services provide users remote capabilities including mobile device management (MDM) and software defined wide area networking (SD-WAN).
We have majority ownership of Franklin Technology Inc. (FTI), a research and development company based in Seoul, South Korea. FTI primarily provides design and development services for our wireless products.
Our products are generally marketed and sold directly to wireless operators and indirectly through strategic partners and distributors. Our global customer base primarily extends from North America to Asia.
FACTORS THAT MAY INFLUENCE FUTURE RESULTS OF OPERATIONS
We believe that our revenue growth will be influenced largely by (1) the successful maintenance of our existing customers, (2) the rate of increase in demand for wireless data products, (3) customer acceptance of our new products, (4) new customer relationships and contracts, and (5) our ability to meet customers’ demands.
We have entered into and expect to continue to enter into new customer relationships and contracts for the supply of our products, and this may require significant demands on our resources, resulting in increased operating, selling, and marketing expenses associated with such new customers.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Management evaluates these estimates and assumptions on an ongoing basis. Our estimates and assumptions have been prepared on the basis of the most current reasonably available information. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions and conditions.
| 24 |
We have several critical accounting policies, which were described in our Annual Report on Form 10-K for the year ended June 30, 2022, that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective, and complex judgments. Typically, the circumstances that make these judgments difficult, subjective, and complex have to do with making estimates about the effect of matters that are inherently uncertain. There were no material changes to our critical accounting policies during the nine months ended March 31, 2023.
RESULTS OF OPERATIONS
The following table sets forth, for the three and nine months ended March 31, 2023 and 2022, our statements of comprehensive income including data expressed as a percentage of sales:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net sales | 100.0% | 100.0% | 100.0% | 100.0% | ||||||||||||
| Cost of goods sold | 82.7% | 79.7% | 84.2% | 81.3% | ||||||||||||
| Gross profit | 17.3% | 20.3% | 15.8% | 18.7% | ||||||||||||
| Operating expenses | 21.3% | 36.5% | 24.3% | 56.3% | ||||||||||||
| Loss from operations | (4.0% | ) | (16.2% | ) | (8.5% | ) | (37.6% | ) | ||||||||
| Other income, net | 0.9% | 0.9% | 2.0% | 2.7% | ||||||||||||
| Net loss before income taxes | (3.1% | ) | (15.3% | ) | (6.5% | ) | (34.9% | ) | ||||||||
| Income tax (benefit) provision | (4.9% | ) | (3.6% | ) | (2.0% | ) | (9.5% | ) | ||||||||
| Net income (loss) | 1.8% | (11.7% | ) | (4.5% | ) | (25.4% | ) | |||||||||
| Less: non-controlling interest in net (loss) income of subsidiary | (0.3% | ) | (0.2% | ) | (0.1% | ) | 0.4% | |||||||||
| Net income (loss) attributable to Parent Company stockholders | 2.1% | (11.5% | ) | (4.4% | ) | (25.8% | ) | |||||||||
THREE MONTHS ENDED MARCH 31, 2023 COMPARED TO THREE MONTHS ENDED MARCH 31, 2022
NET SALES - Net sales increased by $5,164,684, or 77.2%, to $11,851,971 for the three months ended March 31, 2023 from $6,687,287 for the corresponding period of 2022. For the three months ended March 31, 2023, net sales by geographic regions, consisting of North America and Asia, were $11,720,894 (98.9% of net sales) and $131,077 (1.1%), respectively. For the three months ended March 31, 2022, net sales by geographic regions, consisting of North America and Asia, were $6,687,287 (100.0% of net sales) and $0 (0.0%), respectively.
Net sales in North America increased by $5,033,607, or 75.3%, to $11,720,894 for the three months ended March 31, 2023 from $6,687,287 for the corresponding period of 2022. The increase in net sales in North America was primarily due to the demand for one newly launched wireless product from a major carrier customer (approximately 51.8% of net sales), which did not purchase our products during the corresponding period of 2022. Net sales in Asia increased by $131,077, or 100.0%, to $131,077 for the three months ended March 31, 2023 from $0 for the corresponding period of 2022. The increase in net sales was primarily due to the demand for one newly launched wireless product from a customer (approximately $160,000).
GROSS PROFIT - Gross profit increased by $686,180, or 50.5%, to $2,045,510 for the three months ended March 31, 2023 from $1,359,330 for the corresponding period of 2022. The gross profit in terms of net sales percentage was 17.3% for the three months ended March 31, 2023 compared to 20.3% for the corresponding period of 2022. The increase in gross profit was primarily due to the change in net sales as described above. The decrease in gross profit in terms of net sales percentage was the mixed results of competitive selling prices and the increase in production costs of the launched products.
| 25 |
OPERATING EXPENSES - Operating expenses increased by $75,206, or 3.1%, to $2,516,105 for the three months ended March 31, 2023 from $2,440,899 for the corresponding period of 2022. Selling, general, and administrative expenses increased by $72,714 to $1,463,433 for the three months ended March 31, 2023, from $1,390,719 for the corresponding period of 2022. The increase in operating expenses was primarily due to the increased payroll expenses. Research and development expense increased by $2,492 to $1,052,672 for the three months ended March 31, 2023, from $1,050,180 for the corresponding period of 2022.
OTHER INCOME, NET - Other income, net increased by $47,449, or 84.5%, to $103,570 for the three months ended March 31, 2023 from $56,121 for the corresponding period of 2022. The increase was primarily due to the increased interest income of approximately $160,000, the increased unrealized gain from an investment account of approximately $111,000, and the increased gain from the forgiven liability of approximately $25,000, which was offset by the increased loss from the unfavorable changes in foreign currency exchange rates of approximately $250,000 in FTI.
NINE MONTHS ENDED MARCH 31, 2023 COMPARED TO NINE MONTHS ENDED MARCH 31, 2022
NET SALES - Net sales increased by $17,091,618, or 144.2%, to $28,944,554 for the nine months ended March 31, 2023 from $11,852,936 for the corresponding period of 2022. For the nine months ended March 31, 2023, net sales by geographic regions, consisting of North America, the countries in the Caribbean and South America, and Asia, were $28,778,479 (99.4% of net sales), $0 (0.0% of net sales), and $166,075 (0.6% of net sales), respectively. For the nine months ended March 31, 2022, net sales by geographic regions, consisting of North America, the countries in the Caribbean and South America, and Asia, were $11,143,335 (94.0% of net sales), $2,375 (0.0% of net sales), and $707,226 (6.0% of net sales), respectively.
Net sales in North America increased by $17,635,144, or 158.3%, to $28,778,479 for the nine months ended March 31, 2023 from $11,143,335 for the corresponding period of 2022. The increase in net sales in North America was the mixed result of the new demand for two newly launched wireless products from a major carrier customer (approximately $7.8M newly generated revenue), which did not purchase our products during the corresponding period of 2022, and the increased demand of approximately $12.6M for our wireless products from the existing major carrier customer compared to the corresponding period of 2022, which were offset by the decreased demands from other customers.
Net sales in the Caribbean and South America decreased by 2,375, or 100.0%, to $0 for the nine months ended March 31, 2023 from $2,375 for the corresponding period of 2022. The decrease in net sales was primarily due to the general nature of sales in these regions, which often fluctuate significantly from period to period due to the timing of orders placed by a relatively small number of customers.
Net sales in Asia decreased by $541,151, or 76.5%, to $166,075 for the nine months ended March 31, 2023 from $707,226 for the corresponding period of 2022. The decrease in net sales was primarily due to the one-time revenue generated from the material sales by FTI for the prior period, which was partially offset by the revenue generated from the demand for one newly launched wireless product by FTI (approximately $160,000) for the nine months ended March 31, 2023.
GROSS PROFIT - Gross profit increased by $2,369,140, or 106.9%, to $4,585,414 for the nine months ended March 31, 2023 from $2,216,274 for the corresponding period of 2022. The gross profit in terms of net sales percentage was 15.8% for the nine months ended March 31, 2023 compared to 18.7% for the corresponding period of 2022. The increase in gross profit was primarily due to the change in net sales as described above. The decrease in gross profit in terms of net sales percentage was the mixed results of competitive selling prices and the increase in production costs of the launched products.
OPERATING EXPENSES - Operating expenses increased by $365,693, or 5.5%, to $7,038,242 for the nine months ended March 31, 2023 from $6,672,549 for the corresponding period of 2022.
| 26 |
Selling, general, and administrative expenses increased by $545,707 to $4,039,035 for the nine months ended March 31, 2023, from $3,493,328 for the corresponding period of 2022. The increase in selling, general, and administrative expenses was primarily due to the increased payroll expenses and compensation expenses related to stock options granted for employees of approximately $446,000 and $163,000, respectively. Research and development expense decreased by $180,014 to $2,999,207 for the nine months ended March 31, 2023, from $3,179,221 for the corresponding period of 2022. The decrease in research and development expense was primarily due to the mix of the timing of research and development activities and the number of active projects, which typically vary from period to period.
OTHER INCOME, NET - Other income, net increased by $267,447, or 82.7%, to $590,925 for the nine months ended March 31, 2023 from $323,478 for the corresponding period of 2022. The increase was primarily due to the increased interest income of approximately $276,000, the increased unrealized gain from an investment account of approximately $163,000, and the increased gain from the forgiven liability of approximately $190,000, which was offset by the increased loss from the unfavorable changes in foreign currency exchange rates of approximately $299,000 in FTI and the decreased product development funding received by FTI from a government entity of approximately $52,000.
LIQUIDITY AND CAPITAL RESOURCES
Our historical operating results, capital resources and financial position, in combination with current projections and estimates, were considered in management's plan and intentions to fund our operations over a reasonable period of time, which we define as the twelve-month period ending from the date of the filing of this Form 10-Q. For the purposes of liquidity disclosures, we assess the likelihood that we have sufficient available working capital and other principal sources of liquidity to fund our operating activities and obligations as they become due.
Our principal source of liquidity as of March 31, 2023 consisted of cash and cash equivalents as well as short-term investments of $33,978,340. We believe we have sufficient available capital to cover our existing operations and obligations through at least one year from the date of the filing of this Form 10-Q. Our long-term future cash requirements will depend on numerous factors, including our revenue base, profit margins, product development activities, market acceptance of our products, future expansion plans and ability to control costs. If we are unable to achieve our current business plan or secure additional funding that may be required, we would need to curtail our operations or take other similar actions outside the ordinary course of business in order to continue to operate as a going concern.
OPERATING ACTIVITIES - Net cash used in operating activities for the nine months ended March 31, 2023 and 2022 was $7,044,244 and $7,296,402, respectively.
The $7,044,244 in net cash used in operating activities for the nine months ended March 31, 2023 was primarily due to the increase in accounts receivable of $5,886,082 and inventories of $1,713,431 as well as our operating results (net loss of $1,298,722 adjusted for depreciation, amortization, and other non-cash charges), which was partially offset by an increase in accounts payable of $1,214,246. The $7,296,402 in net cash used in operating activities for the nine months ended March 31, 2022 was primarily due to the increase in inventories of $6,676,070 as well as our operating results (net loss of $3,005,937 adjusted for depreciation, amortization, and other non-cash charges), which was partially offset by an increase in accounts payable of $2,533,695.
INVESTING ACTIVITIES - Net cash used in investing activities for the nine months ended March 31, 2023 and 2022 was $1,731,707 and $1,780,484, respectively.
The $1,731,707 in net cash used in investing activities for nine months ended March 31, 2023 was primarily due to the payments for purchase of capitalized product development of $1,601,998 and purchase of short-term investments of $71,927. The $1,780,484 in net cash used in investing activities for the nine months ended March 31, 2022 was primarily due to the purchases of short-term investments of $1,240,376 and the payments for capitalized product development of $475,366.
FINANCING ACTIVITIES - Net cash provided by financing activities for the nine months ended March 31, 2023 and 2022 was $134,000 and $21,595, respectively.
| 27 |
The $134,000 and $21,595 in net cash provided by financing activities for the nine months ended March 31, 2023 and 2022 was from cash received from exercise of stock options.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
Leases
We lease approximately 12,775 square feet of office space in San Diego, California, at a monthly rent of $25,754, pursuant to a lease expiring in December 2023. In addition to monthly rent, the lease includes payment for certain common area costs. Our facility is covered by an appropriate level of insurance, and we believe it to be suitable for our use and adequate for our present needs. Our Korea-based subsidiary, FTI, leases approximately 10,000 square feet of office space, at a monthly rent of approximately $8,000, and additional office space consisting of approximately 2,682 square feet at a monthly rent of approximately $2,700, both located in Seoul, Korea. These leases will expire on August 31, 2023. In addition to monthly rent, the leases provide for periodic cost of living increases in the base rent and payment for certain common area costs. These facilities are covered by an appropriate level of insurance, and we believe them to be suitable for our use and adequate for our present needs. We lease one corporate housing facility, located in Seoul, Korea, primarily for our employees who travel, under a non-cancelable operating lease that will expire on September 4, 2023.
Rent expense for the three months ended March 31, 2023 and 2022 was $111,469 and $111,513, respectively. Rent expense for the nine months ended March 31, 2023 and 2022 was $334,146 and $334,651, respectively.
Recently Issued Accounting Pronouncements
Refer to NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES in the Consolidated Financial Statements.
OFF-BALANCE SHEET ARRANGEMENTS
None.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company,” the Company is not required to respond to this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our President and Acting Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our President and our Acting Chief Financial Officer have concluded that, as of March 31, 2023, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and (ii) accumulated and communicated to our management, including our principal executive and principal accounting officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 and as a result of adopting Topic 842) during the nine months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| 28 |
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have provided information about legal proceedings in which we are involved in Note 8 of the notes to consolidated financial statements for the three and nine months ended March 31, 2023, contained within this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
Our Annual Report on Form 10-K for the fiscal year ended June 30, 2022, filed with the SEC on September 13, 2022 (the “Annual Report”), includes a detailed discussion of our risk factors under the heading “PART I, ITEM 1A – RISK FACTORS.” You should carefully consider the risk factors discussed in our Annual Report, as well as other information in this quarterly report. Any of these risks could cause our business, financial condition, results of operations and future growth prospects to suffer. We are not aware of any material changes from the risk factors previously disclosed.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
On November 10, 2022 the Company and OC Kim, its President, entered into an amendment of the employment letter agreement dated September 7, 2021. The amendment provides for a severance payment of $3 million if Mr. Kim voluntarily terminates his employment by the Company or if he voluntarily terminates his employment due to a “change in circumstances,” generally defined as a material breach by the Company of its salary and benefit obligations or a significant reduction in Mr. Kim’s title or responsibilities. In the case of a termination of employment by the Company for cause (generally defined as conviction of a felony, or a misdemeanor where imprisonment is imposed, commission of any act of theft, fraud, dishonesty, or material falsification of any employment or Company records, or improper disclosure of the Company's confidential or proprietary information), the Company is to make a severance payment of $1,500,000. In either case, any unvested options become immediately vested.
In the amendment, Mr. Kim also agrees that, for a period of two years after termination, he will not disparage the Company or its officers, solicit any of its employees to terminate their employment, or disclose any of the Company’s proprietary information.
In addition, the amendment provides for the payment of an incentive bonus to Mr. Kim of $125,000 for each calendar quarter during the remaining four-year term of the employment letter, with the first such bonus due on December 31, 2022.
The Change in Control Agreement with Mr. Kim, dated October 1, 2020, has not been terminated and remains in effect at this time.
| 29 |
ITEM 6. EXHIBITS
| Exhibit No. | Description | |
| 10.1 | Amendment No. 1 to Employment Agreement, dated November 10, 2022 (1) | |
| 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Schema Document | |
| 101.CAL | XBRL Calculation Linkbase Document | |
| 101.DEF | XBRL Definition Linkbase Document | |
| 101.LAB | XBRL Label Linkbase Document | |
| 101.PRE | XBRL Presentation Linkbase Document |
________
(1) Incorporated by reference from Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, filed on November 14, 2022.
| 30 |
SIGNATURES
In accordance with Section 13 of 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Franklin Wireless Corp. | ||
| By: | /s/ OC Kim | |
|
OC Kim President (Principal Executive Officer) | ||
| By: | /s/ Bill Bauer | |
| Bill Bauer | ||
|
Acting Chief Financial Officer (Principal Financial Officer) | ||
Dated: May 15, 2023
| 31 |